TheWalt$Disney$Company$–$ThePowerful$Disney$Halo$€¦ ·...

The Walt Disney Company 14th October 2015/page 1

The Walt Disney Company – The Powerful Disney Halo

Rating: Buy (30.78% upside) Share Price: US$105.56 Target Price: US$138.05

Executive Summary I am recommending a BUY on The Walt Disney Company, with a 12-‐month price target of $138.05, representing an upside of 30.78%. It is one of the world’s largest multinational entertainment conglomerates founded in 1929, and is currently one of the world’s leaders in theme parks, movies, and media networks. Despite the slowdown of the media networks industry, we believe that the Iger’s foresight in carrying out expansion plans in the past decade is finally paying off for the company, with Net Income increasing 85.6% from 2010-‐2014, and ROE with a five-‐year 9.1% CAGR. We believe that Disney’s strong fundamentals and dominant market positions in numerous business segments will enable it to have continual growth, especially given:

• Shanghai Disney Resort targets 1.4 billion audience, 3x of US population The Walt Disney Company is the largest theme park group in the world, holding a market share of 58.24% in theme park attendance amongst the top 25 theme parks in the world, and a market share of 90.93% when compared amongst the top 10 theme parks globally in 2014. The completion of Shanghai Disney resort in 2016 is poised to provide room for further growth, and cements the company’s position as the dominant name in the theme parks business.

• The Force is Stronger with Marvel Heroes and the return of Princess Elsa The strategic acquisitions of Pixar, Marvel Studios are finally paying off dividends, as seen from Studio Entertainment’s 134% increase in Operating Income from 2013 to 2014, helped by Marvel Studios’ movies and continued success in animation movies such as Frozen. Disney’s release of Lucasfilm’s Star Wars movie in Dec 2015 after a 10-‐year hiatus has also generated much fanfare, and its continued string of Star Wars movies planned is expected to improve Disney’s earnings in the years to come. Furthermore, China’s five-‐year historical CAGR of 33% and 38% in China’s movie audience growth and number of cinema screens per million people respectively gives Disney’s studio entertainment segment more room for growth.

• Disney’s magical appeal to all age groups from children to adults Disney currently generates approximately 3x more retail sales than the next largest licensor, with majority of the segment’s revenue coming from its licensing revenues. With a five-‐year historical OI CAGR of 14.9%, the strength of the Consumer Products segment lies in its large portfolio of Intellectual Property (IP), and its partnerships with thousands of licensing partners from clothes to toy manufacturers. We predict that consumer products will be the fastest growing segment through FY2019, driven by growing IP from Marvel Studio, Lucasfilms and Disney’s animation studios, and Chinese companies’ demand for Disney’s IP.

Financial Highlights

Financial Year End: Sept FY13 FY14 FY15E FY16E FY17E Revenue (USD m) 42,278 48,813 53,664 60,311 66,151 EBIT (USD m) 9,855 12,223 12,631 14,738 16,465 Net Profit (USD m) 6,636 8,004 8,111 9,481 10,603 EPS (USD /share) 3.38 4.26 4.53 5.54 6.50 Net Profit net of ex (USD m) 6,136 7,501 7,608 8,978 10,100 Revenue YoY % 6.5% 8.4% 9.9% 12.4% 9.7% EBIT YoY % 2.3% 24.0% 3.3% 16.7% 11.7% EPS YoY % 8.3% 26.0% 6.2% 22.4% 17.2% EBIT Margin (%) 21.9% 25.0% 23.5% 24.4% 24.9% Net Profit Margin (%) 13.6% 15.4% 14.2% 14.8% 15.2% P/E (x) 18.7x 20.4x 23.3x 19.1x 16.2x P/B (x) 2.3x 3.2x 3.2x 2.7x 2.6x EV/EBITDA (x) 11.5x 12.1x 13.9x 11.7x 10.2x Dividend Yield (%) 1.2% 1.3% 1.1% 0.9% 1.1%

Source: Analyst

Company Name: The Walt Disney Co. Ticker: NYSE.DIS

Share Price: S$105.56 Target Price: S$138.05 (30.78% upside) Rating: Buy Valuation method: DCF, Multiples

Market Cap (US$m): 170,423 Avg 1mth daily value traded (US$m/day): 9m Approx. Shares outstand (m): 1,759 Freefloat: 92.2% Major shareholders: Laurene Powell Jobs Trust, 7.71% Vanguard Group Inc, 5.12% BlackRock, 4.97% Research Analyst: Tan Jun Rong Pius [email protected]


Case for Disney: “Mature company? – Not for studios & parks” Disney has historically derived its largest revenue from Media Networks, which accounts for an average of 45% of Group revenue yearly, followed by Parks & Resorts at 30%, and Studio Entertainment at 15%.1 Disney’s respective business segments have a unique synergy collectively, wherein the success of studio entertainment’s theatrical distribution improves the margins of Disney’s theme parks and consumer product sections. Hence, the company’s crown jewel lies in its studio entertainment business, which has the potential to grow its overall business. Disney produced 4 of the top yearly movies from 2010-‐2015 and holds the 2nd largest market share of 14.35% in movie distribution. Despite its market share, we believe this segment has more room to grow, due to its ability to create sequels on decades of successful movie franchises, addition of Lucasfilms’ Star Wars franchise, and China’s booming cinema industry.

Movies with box-‐office hits provide Disney with new IP that paves the way for new theme park rides, licensing opportunities, and generates more retail products. With a vast portfolio of old and new IP spanning from Disney’s first Snow White movie, Disney’s Consumer Products division is the largest consumer licensor in the world, and its most under-‐appreciated division. With the upcoming Star Wars movie in Dec 2015, Disney’s thousands licensees such as Hasbro and Mattel are seeking to buy Lucasfilm’s IP to produce toys and games on Star Wars, which will increase the licensing revenues. Disney’s licensing business is very capital efficient with no fixed costs, providing Disney with high margins.

Successful M&A track record: “Conglomerate that knows no bounds” Since 2000, Disney under Iger’s management has been aggressive in acquiring companies that complement their businesses. Compared to America’s population of slightly over 300 million people, Disney’s decision to open a theme park in 1.4 billion-‐strong China sets the company on a trajectory of high growth after the initial costs have been recovered. Spillover effects in its Studio entertainment will also be felt when the Chinese buy into Disney ideas, increasing the appetite for Disney films, and licensing partners will seek Disney’s IP to sell more products in China. Disney’s first mover advantage into Hong Kong and China markets is bound to pay dividends in the long run, and provides it with a new market to create bigger content.

Furthermore, Disney is expanding its domestic theme parks. It has announced plans of a 14-‐acre Star Wars lands in 2016, which will be the largest single-‐themed area expansion in the company’s history. Other upcoming projects include adding Iron Man experience to Hong Kong Disneyland, and an Avatar-‐themed land in Disney’s Animal Kingdom. Universal’s addition of the Harry Potter World to its Orlando theme park in attendance has grown by 17% from 7.1 million in 2013 to 8.3 million in 2014. Likewise, we hold the view that the addition of these new attractions will help boost attendances for 2016 as well.

Industry Outlook: “Light is seen at the end of the tunnel” Parks & Resorts: Amongst the theme park industry, Disney has been the leader at 34.3%, followed behind by Merlin Entertainment group at 16.0% and Universal Studios at 10.2%. Considering its dominant position in America, there is little room for growth besides the addition of new theme park rides, which Disney has planned to do in the upcoming years. The highly anticipated opening of Shanghai’s Disney Resort signifies the company’s interest in seeking room for growth in China, which we believe is a catalyst that will help Disney grow its Parks & Resorts segmental business.

Amongst the industry players, we believe that Disney has the highest potential for growth due to its strong branding presence. Other theme parks merely emulate rides and provide consumers with the thrill of theme park rides, but Disneyland provides consumers with an experience as well, hence its nickname as the “Happiest place on Earth”. Thus, the emphasis on consumer experience is what puts Disney theme parks well ahead of its competitors. Furthermore, Disney’s brand has been growing globally, since the opening of Tokyo Disneyland in 1985, to Paris Disneyland, Hong Kong Disneyland, and the upcoming Shanghai Disney Resort in 2016. The presence of such theme parks increases Disney’s brand penetration internationally, and ripple effects will be felt amongst its studio entertainment and consumer products segments.

Media Networks: Currently, the U.S. television industry is entering a period of prolonged structural decline, caused by a

1 Calculated as a 5-‐year average of 2010-‐2014 revenues.


migration of viewers from ad-‐supported platforms to non/less-‐ad-‐supported platforms. As confirmed by Iger’s recent comments on the slowing media networks and sell-‐off of media stocks in August, we fear the entire sector will struggle to work until the content owners take concerted action to reclaim on-‐demand viewing from the SVOD services and use it to protect affiliate fees. Across the board, many of Disney’s competitors are heavily reliant on the success of the cable networks and broadcasting industry for revenue, with 73.8% of Viacom’s revenue arising from media networks, 67.1% for 21st Century Fox, 90.0% for Comcast, Time Warner at 75.0%, and 80.0% for CBS2. Unlike its competitors, Disney has a portfolio of unique and valuable assets that benefit from strong synergies from IP creation to multi-‐ pronged monetization, and is able to make up for lack of revenues through its other segments.

Furthermore, we believe that Disney’s ESPN is the major channel that sustains its media networks segment. It is the most powerful ad-‐supported cable network and is arguably least at risk (in the long-‐term) of disintermediation by distributors, especially given its dominant position in sports television. Due to the nature of sports events, consumers are willing to fork out money to watch them live, and watching sports replays online are quite unheard of. Hence consumers will still be willing to watch ESPN live sports broadcasts, and advertising and affiliate fees will not be declining anytime soon for this company. ESPN is the key driver that gives Disney a competitive advantage over its peers amidst the structural decline, at least in the cable television industry.

Studio Entertainment: As of 2015 YTD, NBCUniversal(Comcast) holds the dominant market share of 28.5%, followed by Disney at 17.2% and Time Warner at 16.2%. Cumulatively, the top 4 movie production studios hold a market share of 73.2%. The usual 6 companies of Disney, Time Warner, Fox, Comcast, Paramount and Sony hold approximately 90% of market share, hence it showcases low competitive rivalry as these major players dominate this oligopolistic market. Amongst them, Disney has been consistently the 2nd highest market share position for total earnings since 2013, and never deviated from holding the top 4 positions since 2010. Iger’s acquisitions in Marvel, Pixar and Lucasfilms showed Disney’s dedication to developing its Studios Entertainment segment, and we believe this segment will be poised for more growth amidst Disney’s brand influence in the China market.

Amongst the industry players, we believe that Disney has the highest potential for growth due to its strong brand presence. Many of America’s Baby Boomers grew up watching Disney films such as Pinocchio, Snow White and such. These baby boomers are now parents of today’s generation of children, and hence they will be keen on bringing their kids to experience Disney movies as well.

Discounted Cash Flow valuation on Walt Disney At a calculated WACC of 5.87%, and a terminal growth rate of 1.9%, we arrived at a valuation of $138.05, with an upside of 30.78%. Given that Disney is a global company with a forecasted 79.8% of 2016 revenue arising domestically from the United States, I arrived at an estimate of 1.9% growth rate, by using a weighted average of Disney’s geographical theme park businesses, namely Japan, Hong Kong, China, France and the United States of America. I used the theme park locations as proxies because those are the areas where Disney’s brand resonates due to the presence from their parks.

Figure: Yellow areas show upside >20%.

2 Calculated approximately, based on latest annual earnings result.


In my terminal growth rate assumptions, I used an average GDP growth rate of each country since 2000, and multiplied each growth rate respectively with the percentage of geographical revenue segments, hence arriving at a figure of 1.9%.

Peer valuation comparison table

Source: Bloomberg, Analyst estimates

Walt Disney currently has the highest expected P/E ratio of 19.1x for 2016, and we believe it is because the market is anticipating higher growth for Disney due to the opening of Shanghai Resorts and Star Wars films. Disney’s EV/EBITDA also dominates its peer group at a 2016E EV/EBITDA of 11.7x, mainly due to the high debt the company holds because of investments in Shanghai Disney Resort. These high multiples can be attributed to Disney’s high EPS growth of 22.4% from 2015 to 2016E. Consensus estimates put Disney’s 2016E EPS at 5.4, but I have estimated it at 5.54 because of high earnings due to the catalysts of Shanghai and Star Wars, which will have positive effects throughout Disney’s business lines in 2016.

Hence, we believe that it is Disney’s high EPS growth well above the industry’s EPS growth that makes it seem overvalued relative to its peers. Furthermore, Disney’s well-‐known brand and diversified business segments compared to its peers is also another reason why we believe it looks overvalued.

We have projected a declining revenue growth rate from 2016 to 2019, mainly due to higher revenue growth rates from our expected catalysts in 2015 and 2016. We incorporated a slowdown in the Media Networks segment in our model as well, and hence expect the revenue share of Media Networks segment to decline to 31.8% by 2019, down from 43.3% in 2014. Combined, we forecast Park & Resorts, Consumer Products, and Studio Entertainment to grow from 54.0% in 2014 to 68.2% in 2019.

Investment risk The cable television industry has been taking a hard hit in recent years, and Iger’s comments after Disney’s Media Networks negative 3Q earnings gained everybody’s attention. However, we have already incorporated the slowing growth of Media Networks into our target price. Further risks to the target price could be due to:

1. Worsening macro economic conditions that will hurt consumer products, studio entertainment, and Parks & Resorts revenues.

2. The Film production unit may fail to create box-‐office hits, resulting in no spillover effects to Consumer Products, Parks & Resorts, and Interactive divisions.

3. High fixed costs in Disney’s Parks division make it difficult for Disney to allocate capital efficiently during worsening economic conditions.

4. Any negativity to the Disney name will definitely hurt earnings throughout all its business segments.


Appendix

Company Financials and Ratios





Media Networks(ESPN visitors data)

Studio Entertainment

Year Movie Worldwide Gross box-‐office (USD) 2010 Alice in Wonderland $1,025,491,110

Prince of Persia: Sands of Time $314,594,597 Toy Story 3 $1,069,818,229 The Sorcerer’s Apprentice $217,986,320 Secretariat $60,376,247 Tron: Legacy $397,562,763 Iron Man 2 $623,256,345 Tangled $586,581,936

2011 Mars Needs Moms $39,549,758 Zokkomon $2,815 African Cats $17,883,747 Prom $10,763,183 Pirates of the Caribbean: On Stranger Tides $1,045,663,875 Cars 2 $560,155,383 Winnie the Pooh $50,145,607 The Muppets $160,971,922 Thor $499,326,618 X-‐Men: First Class $355,408,305 Captain America: The First Avenger $370,569,776

2012 John Carter $282,778,100 The Odd Life Of Timothy Green $52,685,425 Frankenweenie $81,150,788 Ghost Rider: Spirit of Vengeance $149,217,355 The Avengers $1,519,479,547 The Amazing Spiderman $757,890,267 Brave $554,606,532 Wreck-‐It Ralph $473,412,677

2013 Oz the Great and Powerful $489,570,996 The Lone Ranger $259,989,910 Iron Man 3 $1,215,392,272 The Wolverine $416,456,852 Thor: The Dark World $633,360,018 Monsters University $743,588,329 Frozen $1,274,234,980


2014 Planes: Fire and Rescue $96,657,732 Khoobsurat $1,055,593 Captain America: The Winter Soldier $713,846,958 The Amazing Spiderman 2 $708,996,336 Guardians of the Galaxy $771,172,112 Big Hero 6 $652,127,828

2015 ABCD 2 $1,021,905 The Avengers: Age of Ultron $1,404,650,552 Ant-‐Man $409,485,078 Fantastic Four $165,358,099 Inside Out $792,252,737 Strange Magic $13,125,766 Star Wars: The Force Awakens $-‐ The Good Dinosaur $-‐

2016 A Beautiful Planet $-‐ Finding Dory $-‐ Deadpool $-‐ Sinister Six $-‐ Doctor Strange $-‐ Captain America: Civil War $-‐

2017 Guardians of the Galaxy 2 $-‐ Cars 3 $-‐ Pirates of the Caribbean: Dead Men Tell No Tales $-‐ Spider-‐Man $-‐ Coco $-‐ Jungle Cruise $-‐ Thor: Ragnarok $-‐ The Haunted Mansion $-‐

2018 Mulan $-‐ Black Panther $-‐ Mary Poppins $-‐ Night On Bald Mountain $-‐ Genies $-‐ Avengers: Infinity War Part 1 $-‐ Black Panther $-‐ Untitled Pixar Animation Project 2018 $-‐ Toy Story 4 $-‐ Frozen 2 $-‐ Ant-‐Man and The Wasp $-‐ Untitled Hans Solo Star Wars Spinoff $-‐

2019 Avengers: Infinity War Part II $-‐ Captain Marvel $-‐ Inhumans $-‐ Incredibles 2 $-‐ Star Wars: Ep. IX $-‐


Consumer Products

U.S

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iaJune 3, 2015

Todd Juenger (Senior Analyst) • [email protected] • +1-212-823-3157

12

Exhibit 11Disney's Pixar Films Regularly Receive Critical Acclaim

Exhibit 12Marvel Films Have Also Received Largely Positive Critical Reviews

Note: The Tomatometer rating – based on the published opinions of hundreds of film and television critics – is a trusted measurement of movie and TV programming quality for millions of moviegoers. It represents the percentage of professional critic reviews that are positive for a given film or television show.

Source: Rottentomatoes.com, Bernstein analysis

Note: The Tomatometer rating – based on the published opinions of hundreds of film and television critics – is a trusted measurement of movie and TV programming quality for millions of moviegoers. It represents the percentage of professional critic reviews that are positive for a given film or television show.

Source: Rottentomatoes.com, Bernstein analysis

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March 24, 2014

Todd Juenger (Senior Analyst) • [email protected] • +1-212-823-3157

5

to a heavier COGS component within the cost structure. For a business overview of the Licensing and Publishing businesses, see Exhibit 4.

Exhibit 2Disney is Believed to Be the Top Brand Licensor in the World

Source: License! Global, Bernstein analysis

Exhibit 3Illustrative List of Recent License Partnership Deals

Source: Company reports, Bernstein analysis

Retail Brand Group Representative Brands Sales ($bn)

Disney Consumer Products Disney Princesses, Marvel, Star Wars $39.3Iconix Brand Group Mudd, DanskinNow, Joe Boxer 13.0PVH Corp Calvin Klein, Tommy Hilfiger 13.0Meredith Better Homes and Gardens 11.2Mattel Barbie, Hot Wheels 7.0Sanrio Hello Kitty 7.0Warner Bros. Consumer Products DC Comics, Harry Potter, The Hobbit 6.0Nickelodeon Consumer Products SpongeBob, Dora, iCarly 5.5Major League Baseball Major League Baseball 5.2Hasbro Transformers, Nerf, My little Pony 4.8

Announce Consumer ProductDate Partner(s) Collaboration / License Deal

02/15/14 Build-A-Bear Workshop Make-Your-Own Disney Princess Pets collection 12/12/13 C-Preme Limited Marvel-inspired protective gear 11/21/13 Huffy Marvel-inspired bicycles 11/08/13 Forever 21 Mickey & Co. collection by Forever 21 label 10/16/13 The Wet Seal Millenial lifestyle brand inspired by ABC Family shows 10/03/13 JCPenney Launch of a Disney Shop inside 565 jcpenney stores 09/30/13 Alfred Angelo 2014 Disney Fairy Tale Weddings collection 09/26/13 Stride Rite Princess-inspired shoes featuring Wish Lights technology 09/18/13 Jay Franco Home décor products inspired by Marvel 09/11/13 Hallmark Stationery inspired by Marvel 06/22/13 Hasbro Extension of Hasbro's Global Toy and Game Merchandise

Rights for Marvel Characters through 2020

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Q&A with management (Date of email: 2015 Oct 13th 1:12AM)

Dear Sir/Madam, I am a shareholder of Walt Disney, and currently researching more about the company. I have a few questions on Disney's operations for the upcoming years, and I hope you can assist me on this. 1. Do you have estimates for forward capital expenditures from 2016-‐2019? 2. When do you estimate Shanghai Disneyland to start earning profits? 3. I understand that DreamWorks will not be renewing its current distribution deal with Walt Disney Co, how would this impact your studio entertainment revenues, if any? 4. What is the biggest risk that might hinder the success opening of Shanghai Disney Resorts? Thank you for reading my email, I hope to hear from you soon. Yours Sincerely, Pius Tan

Reply:

Dear Disney Shareholder,

Please visit this website in you wish to request an annual report to be sent to you. http://thewaltdisneycompany.com/investors/order-‐financials

Thanks,

Marissa

My reply:

Dear Marissa, Thank you for your reply. I have checked the annual report online, and it does not answer the questions I have asked. Is it possible to get my questions answered? Thank you. Sincerely, Pius Disney’s 2nd reply:


Dear Disney Shareholder,

This e-‐mail box is to answer general to complex questions on your investment held here at Broadridge, the Transfer Agent for Disney.

We feel your inquiry would be best suited with Disney Corporate.

Please go to this website: http://thewaltdisneycompany.com/contact-‐us/corporate-‐communications

Thanks,

Marissa

Left a message on Disney’s Corporate Communications Department on my questions on the 17th of October through their website (No email was provided or phone number to contact the Corporate Communications department is provided).

Subsequently, I read “The Walt Disney Company at the Bank of America Merrill Lynch 2015 Media, Communications & Entertainment Conference” transcript(Held on 10th Sept 2015), and “Walt Disney Company’s Q3 Earnings Transcript” to get some information instead.

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